Have you ever heard that you can give away up to $15,000 per person per year to avoid gift tax?
Maybe you make it an annual habit already.
Today, spoiler alert: the government gives with one hand and takes away with the other.
Now, as a general statement. This shouldn't surprise anyone, but when it comes to giving away money and other things to your kid, your family, or anyone you want. There really are some unpleasant surprises out there waiting for you.
What are they? That's what today's episode is all about. This is the smart planning 101 podcast. From Honolulu, Hawaii. Aloha everyone. I'm Nicole Wipp, and I'm your host.
Hello everyone. Before I start, I just want to make sure that you know that although I am a lawyer, I am not giving you legal advice. This podcast is for general informational purposes only. So if things come up. That you think apply to you make sure you're getting personalized advice from the proper legal and tax professionals.
Giving away money and things is actually a lot trickier than you may realize. There are so many times when somebody will come in my office and they'll say something to me like, "oh, but I know that you can give away 10,000 or 11,000 or 15,000" whatever year this person's brain is stuck in around gift tax issues.They say, I know that you can give away x dollars a year per person, and I know that's okay.
And that statement is very problematic. Because it depends on what you mean by saying it's okay. And that's why I really wanted to do this episode. But I spent a lot of time thinking about how to approach it, because to be quite honest with you, this is a pretty complex topic.
So before I talk about the two main things that I want to bring to your attention. I just want to lay the groundwork for what I mean by gifting and what I mean about giving things away.
Because in the many years that I have been an attorney now, I have come to realize that people have very interesting ideas about what gifting means and I've noticed. That people want to make up their own definitions of it, and then think that they are going to get away with their own made up definition.
So this is a problem because the law doesn't allow you to do that. And if you think that you can, while you're going to be very surprised, unpleasantly so, when it comes back to bite you, that's where the trap happens. And so, that's something that we want to make sure that we're avoiding. We want to avoid making up the law and our own mind just because it makes sense to us. And make sure that we are being clear about what the law actually says and how it applies to us, our own money and our decision-making.
And so it can be something as simple as. "Oh, Hey, I'm going to give my nephew a hundred dollars for his graduation and a card." That could be. A gift, right? That's simple. You give a gift of money to a person of a certain sum. "I am going to gift my daughter and son in law, $15,000 this year." " I am going to gift money to the church." That's very simple.
Where it gets a little more complex though is when you give away certain other things that you may not look at as gifts. So for example, If you add your child as a joint owner on your home, that can be, and in multiple instances, is considered a gift. That you actually may need to report.
If you add your child onto a stock that you own. If you, give a car away. Or here's one of my favorites: you want to give your grandson your car? But you sell it to him for a dollar. And now the car is really worth $10,000, but you sold it to them for a dollar. There's a multitude of reasons why people do things like this. But I want you to understand that legally you have given a gift of $9,999 because of the fair market value of that vehicle is $10,000. The fact that you thought you were being tricky by selling it for a dollar doesn't negate, the legality of the fair market value. Okay? And there are places where this can trip you up legally because people do this all the time.
I hear this all the time. And so these are things that are very common that people do that are also gifts. And you have to understand when you are gifting somebody because you're trying to maybe finagle something, which, hey, it's human nature. We want to pay as least amount of taxes as possible. We don't want to pay the cost of the transfer for the vehicle or whatever. This is something that I understand why people do it, but you have to understand that when you do it and then other things happen. That this is where it can become a trap for you. So don't be the person that is ignorant about what gifting really means, right? Like the purpose of the smart planning 101 podcast is to make you smarter and make you understand things. And , it's just about being clear.
So now that we have some clarity that gifting can mean more than just giving away money, it can be, when we are adding people onto accounts and other things of that nature.
I now want to turn to the main issue that this podcast is looking to clarify for you. Which is gift taxes, and understanding what gift taxes really are and how they affect you. And then how gifting is treated when you need long-term care and need to have benefits to pay for that care.
I also will be talking a little bit about step-up in basis and capital gains, to round out the conversation and to clarify some of the issues, but like I said a minute ago, there are a lot of issues entangled in this one seemingly simple issue. So just be aware, like I said, you really do need to understand how this impacts you and your money and your family and your estate, and you do need the proper advice for that. But hopefully what we could do is untangle some of it, so you can at least have some awareness around what you might be facing.
So let's start with some gift tax 1 we can lay the table for this conversation.
As of this episode, the tax rules say that you can give away $15,000 per person per year. Without owing any gift tax. But it really is more fundamental than that guys. What actually is meant by that $15,000 per person per year, is that you can give away $15,000 per person per year before you have to report the gift to the IRS using IRS form 7 0 9.
So for a majority of Americans, and when I say a majority, 99%, if not more than 99% of Americans, the $15,000 per person per year number is really about reporting. It isn't about what you may owe over and above that. And here's the reason why. You have as of this podcast episode, an $11.7 million gift tax exemption per person, $11.7 million per person gift tax exemption, before you would actually owe the federal government any money in gift taxes.
So you have to report anything that's over $15,000 a year to the federal government, but that doesn't mean you will necessarily owe anything to the federal government, because unless you plan on, and even can, which most of you can not even give away more than $11.7 million in your lifetime, then your need to owe gift tax is completely irrelevant because it doesn't apply to you.
Now, of course the tax laws can change, and we know that, but the government has already said that they're not going to clawback, gifts that were given during this time. This is once again, where if you fit into that category, if you plan on or you are giving away more than $11.7 million in your lifetime, then certainly you should be getting really good tax advice. But most of you, this is completely irrelevant.
And so I want you to recognize that $15,000 per person per year just doesn't apply to most Americans except for as a requirement for reporting to the IRS via form 7 0 9. Past that it's not really that big of a deal and doesn't even really need to be on the minds of most of you, and yet many people have this annual giving thing that they do because they think that they should be doing it because they're worried about taxes, gift taxes, and estate taxes at death. But the reality is it doesn't even apply to them.
And the reason why this is really important is because of the second issue, which is if you give away money, and then later on, you need benefits to pay for care. I really want to make sure that you understand that the cost of long-term care is fundamentally more than most people that are listening to this podcast can actually afford for any given length of time. And it's a complex issue. It's something that you should get good advice about, but you need to understand that it's real.
And the problem is when I said in the intro that the law gives with one hand and then it takes away with another, this is exactly where this happens. So, the issue with gift tax I guess the government has given because the gift tax is so high, that it doesn't really apply to most of you, if not every single person that's listening to this podcast.
However, the law takes away by saying, but if you do give away and then you need benefits to help pay for that longterm care, which you can't afford, because it's so expensive. Then you will get penalized for having given that gift. And I want you to understand that in almost every case, it does not matter who you gave the gift to. It does not matter the reason that you gave that gift away that if you weren't doing it to avoid the spend down for Medicaid and all this other stuff that we talk about a lot, even if you were not doing that for that reason, the government does not care there is a bright line rule about gifting. And yes, you can quote unquote, give away $15,000 per person per year, and then not have to report for gift tax purposes to the IRS on your tax return. But you will have to disclose that if you need benefits to pay for care, and then if you have given that away, no matter what the reason is, the government will penalize you for that gift.
And so that's why gifting is very complicated. It is really one of those things that people will say people tell me that you should give away your assets in order to protect them. Or people will say to me, oh, my neighbor said that you have to put your kids on your house to protect your house or the lady at the bank told me to put my kids on my bank account to protect my bank account.
And you hear things like this all the time. And what I really want for people to understand is that this is terrible advice. It is terrible advice for multitude of reasons that I'm not even going to get into on this podcast episode, but it is certainly terrible advice if in the god forbid event you ever need long-term care in the future. And if you give away your money, Now you don't have the money to pay for the care and oh, by the way, you also have a penalty apply to you from the government and you can't get it because you are penalized for having done this and it just creates this no win situation.
That's why the issue of gift tax and gift tax issues is, I think, irreconcilably intertwined with long-term care issues. And unfortunately, a lot of, lawyers, a lot of financial advisors, a lot of CPAs, are always focusing on tax-related issues.
But the long-term care side of it, the combined aspect of that is something that a lot of people just don't have expertise in. And so you can get a lot of good advice about a side of it from one of these people, but very often you're not getting this other side of it. And that's why I did this episode because I really want to make sure that you're listening to the fact that giving away your money and things to people can be very problematic for you.
If that's something that you insist on doing, then we want to have a legal strategy wrapped around it so that you don't ultimately pay the price for having done it. And the price isn't in taxes, guys. It's in being panelized, if you ever need to access benefits to pay for care, which you may need no matter what you think at this point. You really have to have a lot of money to self-insure for long-term care. And most people just don't have that. And so it's just something that you want to be thinking about and recognizing.
Also on top of it, even putting your kids on your assets right now causes other types of tax problems that you may not be aware of. For example, if you add your child to a piece of real property, your house piece of land or something like that, because you want to make sure that it transfers outside of probate, a death or there's a million reasons why you might think that's a great idea. But what you're doing is potentially destroying the step-up in basis for that property. And so instead of passing it at death, which would then give your child or person that you're passing this onto as an inheritance, they get what's called the step-up in basis for tax purposes.
Now, if you put them on it during your life, you're actually reverting all the way back to the basis that you had when you originally got the property, and now they might be stuck paying on the full gain instead of being able to pay it on the gain from whatever happened from the date of death.
And so if you have a property that has a low cost basis, and has appreciated significantly over time, adding your child during your life is just a terrible idea. Aside from the long-term care issues, it's a terrible tax idea, but it has nothing to do with gift tax issues. It has to do with cost basis and step-up in basis issues.
And when you think about gifting, There's a lot of advice out there. But these are already a couple of things that I hear every single day. People do it, all the time. In fact out of 10 people that walked through the door of my office, eight of them will have done something like this.
Another example is stocks, do you want to add your child now to a stock that you purchased some years ago that has appreciated in value?
A great example of this would be, let's say you bought Amazon stock. When it was selling at a low at the end of 2016, it was selling at $710 and 10 cents. As of today, Amazon is selling at $3,265 and 87 cents.
So the increase in value between when it was purchased and today's price. Is $2,555 and 77 cents. The question becomes, do you want your errors to be taxed on an increase in value, or do you want them to get the step up in the basis? That is something that you should be thinking about if one of your concerns is tax avoidance and it shouldn't be. "Oh, I want to put my kid on my stock to avoid probate", which is the reason why most of you are doing it.
And so you want to be thinking about the whole picture, not just this little piece of the picture. That's why understanding gifting, what it means to gift, what taxes might be incurred as a result of a gift, what taxes need to be paid and when, as a result of a gift or what you might be doing that adversely affects. Your tax situation or your heirs tax situation as the result of a gift. And understanding how any gifts affect your ability to pay for long-term care can all be issues that you face with your money and your family, or your parents or your children. You need to understand how this all affects you. And not be making decisions based on one little piece of the puzzle, but rather looking at the bigger picture because.
Once again, this is where the law gives on one hand and then takes away on the other. Just because the law says yes, in one place, if it says no in another place, then the answer ultimately is no. The yes doesn't negate the no. Because nothing ever works to our favor that way, almost in the law. And this is no exception guys. It's just the facts.
Bottom line, okay? I want you to think twice before you start giving away things to people, before you start buying into this idea that you have to give away things to protect them, before you buy into the idea that placing children or other people as owners on your assets in order to avoid probate is a good idea.
Because for most of you, these are really terrible ideas, unless you understand fully the ramifications of that decision and how it affects you monetarily or affects your heirs, monetarily. And the potential consequences of that decision, unless you fully understand them and then you choose to make those decisions. Then that's great.
But for the most part in my experience, what's happening is there's a knee-jerk reaction to advice that has been given in a very specific form for a specific purpose that doesn't contemplate the entire picture for you. And then you can be left, struggling with those decisions later, if those were not decisions that you wanted to make, but you made them anyway, because you were told to make them. It's very complicated. It's very circular. It sounds ridiculous. But the reality is, as these are all things that when I talk to my clients, they get really angry and upset about because nobody ever gave them the whole picture, and didn't explain to them the consequence of that one simple act, what seemed very simple and straightforward at the time actually caused all these ramifications for them down the road.
And so this is just something that you want to be thinking about as well, and be smart about, that's what smart planning is all about.
Now I'm not going to lie. I know that there were a lot of very complicated things that I rolled up into this whole ball in this episode. And I realize that there might be a lot of questions that come, as a result of this episode.
So first and foremost, I highly recommend that if this episode brought up a million questions for you, that you seek out proper legal and financial advice from somebody that can talk to all of these issues simultaneously. That's the first thing that I really would advise you to do get the right help, talk to the right person.
But of course, the other thing that you can do is visit smartplanning101.com/connect and let me know what your questions are. Let me know what's on your mind. Let me know if you think that I didn't explain something well enough. And I will tell you right now, it's possible that I'll tell you, you need to go seek out some legal advice, but it's also possible that I will make your question into the next episode of smart planning 101.
So, I would love to take your questions and make them into episodes. It's really exciting to me when people ask questions and I am able to answer them via a podcast. So please go ahead and do that and also make sure to subscribe. Thank you so much for listening.